"The Sharpe ratio is a risk-adjusted measure of return." Comment.

The Sharpe ratio is a risk-adjusted measure of return that is often used to evaluate the performance of a portfolio. The ratio helps to make the performance of one portfolio comparable to that of another portfolio by making an adjustment for risk. The Sharpe ratio is quite simple, which lends to its popularity. It's broken down into just three components: asset return, risk-free return and standard deviation of return. After calculating the excess return, it is divided by the standard deviation of the risky asset to get its Sharpe ratio. Sharpe ratio = (R X - R f ) / σ(X) Where: X is the investment R x is the average rate of return of x R f is the best available rate of return of a risk-free security (i.e. T-bills) σ (X) is the standard deviation of RX The idea of the ratio is to see how much additional return you are receiving for the additional volatility of holding the risky asset over a risk-free asset - the higher the better. A ratio of 1 or more is considered good, 2 and more is very good, and 3 and more is considered excellent.